Got a handle on Economic Order Quantity? Your EOQ is a calculation that helps you determine optimal ordering quantities for inventory and supplies. Be careful though, there can be lots of subtle costs that are not immediately evident and the numbers can grow exponentially.

The EOQ formula considers total demand for a given item, costs to process an order, and costs associated with storing items for future use.

For example:

• Total demand should take into account deterioration and/or shrinkage, obsolescence, and theft.
• Ordering costs may include payroll, vendor minimums, shipping, handling, and insurance.
• Carrying costs may include storage, interest on investment of working capital, property taxes, and insurance.

Here’s a standard formula for calculating EOQ:

Where:

D = Demand for the Year
O = Ordering Cost for a Single Order
C = Carrying Cost per Unit per Year

Example:

John runs a website business for exercise equipment. Annual demand for the Abdominal Flexer is 9,000 units. The ordering cost for a single order is $110.00, and the carrying cost per unit per year is $2.50.

= 890 units per order to minimize ordering and carrying costs.

Want more information about how this simple equation can work for your business? We’ve got software that can help with this process. Contact Us today. We’ll be glad to help.

Coming soon: How to know when to order.